Are There Fees for Paying Off a Mortgage Early?

So, you finally did it. You scrimped, saved, and now you’re ready to check “Pay off mortgage” off your to-do list. But wait… sorry… does that loan agreement form actually say prepayment penalty? It very well might. Some lenders don’t exactly throw a parade when you try to pay them back ahead of schedule. In fact, they might hit you with fees for the privilege. Let’s break down how paying off a mortgage early could cost you (and how to dodge those sneaky fees).

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What is a prepayment penalty?

A prepayment penalty for paying off your mortgage early is basically a lender’s way of saying, “Not so fast.” It’s a fee some lenders charge if you pay off your mortgage too soon, cutting into the juicy interest payments they were banking on. Think of it like canceling a gym membership early — except instead of losing access to a treadmill, you’re losing actual cash. (Pro tip: Not exactly best way to pay off mortgage.)

How do prepayment penalties work?

Prepayment penalties come in two flavors:

• Soft Prepayment Penalty – You can pay off your loan early if you sell your house, but if you just want to be debt-free faster? That’ll cost you.
• Hard Prepayment Penalty – No matter how you pay off your mortgage early — selling or not — you’re getting slapped with a fee.

The amount varies, but it’s often a percentage of your remaining loan balance or a set number of months’ worth of loan interest. Some lenders structure prepayment penalties to decrease over the first few years, but others impose a fixed fee regardless of when you prepay.

Why do lenders charge prepayment penalties?

Simple: they don’t want to lose out on interest payments if you pay off your mortgage early. When you take out a mortgage, lenders expect to rake in thousands (or even hundreds of thousands) in interest over the years. If you suddenly decide to pay off your mortgage early, they miss out on that sweet cash. A prepayment penalty helps them recoup some of that lost profit. Some lenders structure prepayment penalties to decrease gradually over the first few years of the loan. 

Do all loans have prepayment penalties?

Nope. Not all mortgages come with this sneaky clause. Loans that typically don’t have prepayment penalties include:

• FHA loans
• VA loans
• USDA loans
• Most conventional loans after 2014 (thanks to federal regulations).

If you’re unsure how to pay off mortgage early or whether your mortgage has a prepayment penalty check your loan documents or ask your lender.

How much will I pay in fees?

This depends on your lender’s prepayment penalty schedule. Some charge:

• A percentage of your remaining balance (e.g., 2% of a $250,000 balance = $5,000)
• A set number of months’ worth of interest (e.g., six months of interest on a $250,000 loan at 4%)

Let’s look at an example.

Example of prepayment penalty schedule

Paying off home loan early? Check this out. Here’s a theoretical prepayment penalty schedule for a $250,000 mortgage.

Year of loan	Prepayment penalty	Penalty amount owed
Year 1	3%	$7,500
Year 2	2%	$5,000
Year 3 Year 4	1% 0%	$2,500 $0

Moral of the story: The earlier you pay off your mortgage, the more it might cost you. 

How to avoid prepayment penalty on mortgage

So is this all just a “Pay off mortgage early, suffer the consequences” situation? Not necessarily. You don’t have to just accept these fees — here’s how to sidestep them.

Compare loans 

Considering paying off your mortgage early? Before signing anything, ask potential lenders if they charge a prepayment penalty. If they do, find one that doesn’t. Simple.

Negotiate 

Already locked into a loan? See if your lender is willing to waive the prepayment penalty—especially if you’re refinancing your loan with them. Some lenders may be willing to waive or reduce the penalty if you refinance with them or take out another loan, such as a home equity line of credit (HELOC). Since they’re keeping your business, they may be more flexible on the fee.

Learn what triggers fees

Not all extra payments will set off a prepayment penalty. Some lenders only charge if you pay off the entire balance early, while others penalize you for making large extra payments. Knowing the rules will go far to helping you figure out the best way to pay off mortgage early. 

Know the law 

Thanks to federal regulations, most new home loans can’t have prepayment penalties beyond the first three years, but some non-QM (non-qualified mortgages), such as jumbo loans or private lender mortgages, may still include them.

If you’re wondering what happens if you pay off your mortgage early, check your loan’s closing disclosure, promissory note, or prepayment clause — or ask your lender directly.

Is it worth it to pay off your mortgage early?

If your loan doesn’t have a prepayment penalty, then yes — wiping out your mortgage can be a game-changer. The biggest perk? No more monthly payments. You’ll also save thousands in interest and free up cash for investments.

But if paying off your mortgage early means draining your emergency fund or racking up penalty fees, you might want to rethink your strategy.

The Smart Way to Ditch Your Mortgage Faster 

Unsure how to pay off your mortgage early without paying unnecessary fees? Start by knowing the rules: Some loans welcome early payments, while others punish them. Compare lenders, negotiate terms, and make sure extra payments won’t trigger penalties. The goal? Keep more money in your pocket while kicking that mortgage to the curb on your own terms.

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